Annuity Factor Method

AAA

DEFINITION of 'Annuity Factor Method'

A calculation method to determine the amount of eligible withdrawals that an investor can make from their IRA without incurring penalties. The calculation uses life-expectancy data; however, it utilizes different data than is used in the amortization method.

Using the annuity factor method, a retirement-account holder would divide the current IRA account balance by an "annuity factor." The annuity factor is calculated based on average mortality rates (using the mortality table in Appendix B of IRS Revenue Ruling 2002-62) and "reasonable" interest rates – up to 120% of the Mid-Term Applicable Federal Rate.

INVESTOPEDIA EXPLAINS 'Annuity Factor Method'

Using the annuity factor method, an investor can ensure that he or she does not lose account value to potentially costly penalties. It can also help an account holder determine how much money he or she may need to raise through other means (such as by securing a loan) in addition to withdrawing money from their retirement savings account to meet their current financial needs.

Withdrawing money from a retirement plan should be a careful decision as it gives the account holder less time to recoup value and earn interest on plan assets.

RELATED TERMS
  1. Annuity

    A financial product that pays out a fixed stream of payments ...
  2. Annuitization Method

    A type of annuity distribution structure that gives the annuitant ...
  3. Early Withdrawal

    The removal of funds from a fixed-term investment before the ...
  4. Traditional IRA

    An individual retirement account (IRA) that allows individuals ...
  5. Withdrawal

    Removing funds from an account, plan, pension or trust. In some ...
  6. Contingent Annuitant

    Someone designated by an annuitant to receive the annuitant’s ...
RELATED FAQS
  1. How does a pension income drawdown work?

    While there are similar drawdown plans in the United States, a pension income drawdown plan most commonly refers to a specific ... Read Full Answer >>
  2. What is the difference between a bond's yield rate and its coupon rate?

    An annuity is an investment in which a person receives a fixed sum of money annually. Coupon payments received by a bondholder ... Read Full Answer >>
  3. Is an annuity a perpetuity?

    An annuity can be a perpetuity, depending on how it is set up. An annuity is an investment that makes regular payments throughout ... Read Full Answer >>
  4. What are the most common deferred tax assets used by individuals?

    Deferred tax assets – those that are only taxed when funds are withdrawn or the asset is sold – are quite common in estate ... Read Full Answer >>
  5. Are annuities for seniors only?

    Though annuities tend to be advertised primarily to seniors, there is no reason why younger generations should not make the ... Read Full Answer >>
  6. What is a longevity annuity?

    A longevity annuity is an investment contract with an insurance company designed to address the potential financial problems ... Read Full Answer >>
Related Articles
  1. Retirement

    Borrowing From Your Retirement Plan

    Left with no alternative but to take money out from your retirement savings? Here are some guidelines.
  2. Taxes

    Tax Treatment Of Roth IRA Distributions

    Learn the requirements for withdrawing funds tax and penalty free.
  3. Retirement

    Tips On How To Use IRAs To Boost Retirement Savings

    According to the Trustees of the Social Security Fund, the fund will be depleted by 2037. Are you ready?
  4. Retirement

    Traditional IRA Deductibility Limits

    Find out where you can take a tax deduction on the contributions you make.
  5. Entrepreneurship

    Business Owners: How To Set Up An SEP IRA

    SEP IRAs are simple to set up and run, making them a popular choice for business owners.
  6. Retirement

    How IRA Contributions Affect Your Taxes

    Learn how to work with the tax man to avoid getting gouged when you convert your plans.
  7. Taxes

    9 Penalty-Free IRA Withdrawals

    If you need to take early distributions, find out which exemptions allow you to avoid expensive consequences.
  8. Personal Finance

    Common IRA Rollover Mistakes

    Avoid paying excess taxes by learning some simple transfer rules.
  9. Taxes

    Avoiding IRS Penalties On Your IRA Assets

    The best way to avoid additional charges and taxes is to know which transactions have expensive consequences.
  10. Retirement

    Did Your Roth IRA Conversion Pass or Fail?

    If you are moving assets from a Traditional IRA to a Roth IRA, you need to know the associated tax rules.

You May Also Like

Hot Definitions
  1. Net Worth

    The amount by which assets exceed liabilities. Net worth is a concept applicable to individuals and businesses as a key measure ...
  2. Stop-Loss Order

    An order placed with a broker to sell a security when it reaches a certain price. A stop-loss order is designed to limit ...
  3. Covered Call

    An options strategy whereby an investor holds a long position in an asset and writes (sells) call options on that same asset ...
  4. Butterfly Spread

    A neutral option strategy combining bull and bear spreads. Butterfly spreads use four option contracts with the same expiration ...
  5. Unlevered Beta

    A type of metric that compares the risk of an unlevered company to the risk of the market. The unlevered beta is the beta ...
  6. Moving Average - MA

    A widely used indicator in technical analysis that helps smooth out price action by filtering out the “noise” from random ...
Trading Center